Level Fieldhttp://blogs.forbes.com/alexandrawrage
Tue, 20 Aug 2013 14:29:00 +0000en-UShourly1http://wordpress.org/?v=3.9.2Cautionary Tale: U.S. Bribery Probe Into JP Morgan’s Hiring Practices In Chinahttp://www.forbes.com/sites/alexandrawrage/2013/08/20/cautionary-tale-u-s-bribery-probe-into-jp-morgans-hiring-practices-in-china/
http://www.forbes.com/sites/alexandrawrage/2013/08/20/cautionary-tale-u-s-bribery-probe-into-jp-morgans-hiring-practices-in-china/#commentsTue, 20 Aug 2013 14:29:00 +0000http://blogs.forbes.com/alexandrawrage/?p=161Over the weekend, The New York Times reported on the latest in a string of regulatory investigations into leading financial services firm JP Morgan. This time, the company is embroiled in a Federal investigation involving allegations of possible bribery overseas.

The article, “Hiring in China By JPMorgan UnderScrutiny,” revealed that the Securities and Exchange Commission (SEC) is currently investigating whether the bank’s Hong Kong office hired family members of head executives at state-owned companies in China with the express purpose of winning business and other contracts. The allegations, if true, would amount to violations of the Foreign Corrupt Practices Act (FCPA), and would be an important reminder of the various – often unexpected – forms that corruption can take under the FCPA.

According to documents shown to the N.Y. Times, the SEC saw possible red flags in two suspicious hires by JP Morgan. The first was Tang Xiaoning, the son of Tang Shuangning, chairman of the China Everbright Group, a financial conglomerate operated under the supervision of the State Council of the People’s Republic of China. The second was Zhang Xixi, the daughter of a now-disgraced Chinese official of the Ministry of Railways. After both hires, the bank reportedly secured several important assignments from each company, including advising a subsidiary of Everbright on a stock offering and helping the railway official’s company on its plans to go public.

All this is a reminder of the very broad definition of bribery under the FCPA. Companies are prohibited from giving “anything of value” to a foreign official, which, in addition to hiring a family member, can include such things as, gifts and hospitality, skewed selection processes for scholarships, directing money to favored charities, or sponsoring events at the request of government officials. There is no minimum value for a bribe under the FCPA, which criminalizes anything of any value, if given corruptly.

That’s not to say that companies can never hire family members of a government official. In fact, it’s been fairly common in China for many years. But a company will run into trouble if its hiring practices demonstrate an overall corrupt intent to secure a business advantage from government officials. Unlike with cash payments, “corrupt intent” in hiring cases can be hard to prove, but can be inferred from larger patterns where well-connected individuals appear to have been hired just to secure business. That may be exactly what concerns the SEC with JP Morgan, who, according to reports, suspects that Tang Xiaoning and Zhang Xixi were only two of many young associates who hailed from well-connected Chinese families.

The JP Morgan case should also remind businesses, especially those operating in China, that the definition of “government official” under the FCPA is broader than they might initially think. Under the statute, a “government official” includes the employees of state-owned entities, including even partially state-owned entities. In a country where so much business is owned or controlled by the government, the compliance “best practice” is now to screen everyone for possible government ties.

The JP Morgan story comes at a time of renewed negative attention regarding the hiring practices of the politically well-connected in China. Since May of last year, David Barboza, the Shanghai Bureau Chief of the New York Times, has been writing an extensive Pulitzer Prize winning series of reports on how relatives of top Chinese officials, nicknamed “princelings”, have amassed vast wealth through businesses closely entwined with the state. (Barboza also helped break the JP Morgan report over the weekend.)

These reports indicate that illegitimate hiring practices are eroding confidence in the Chinese government: “The spoils system, for all the efforts to keep a lid on it, poses a fundamental challenge to the legitimacy of the Communist Party,” wrote Barboza last year. And as China’s economy continues to slow down and its leaders make more promises to fight corruption, its likely that renewed attention in this area will only continue to grow.

For multinational businesses hoping to avoid the negative press of JP Morgan, it’s increasingly important to have the compliance professionals ensure that their human resources and hiring practices are transparent and well documented. While perhaps not as pernicious as cash bribes, opaque hiring practices and nepotism can be a symptom of a poor compliance culture at a company. It is no coincidence that over the last several months, JP Morgan has been entangled in a range of regulatory mishaps, from charges that the company misled investors on mortgage-backed securities, to charges of wire fraud and conspiracy to falsify books and records related to trading losses. Now the company can add foreign bribery to that worrying list of ongoing investigations.

]]>http://www.forbes.com/sites/alexandrawrage/2013/08/20/cautionary-tale-u-s-bribery-probe-into-jp-morgans-hiring-practices-in-china/feed/1Pulling Together: Leveraging The Whole Company To Ensure Compliancehttp://www.forbes.com/sites/alexandrawrage/2013/05/28/pulling-together-leveraging-the-whole-company-to-ensure-compliance/
http://www.forbes.com/sites/alexandrawrage/2013/05/28/pulling-together-leveraging-the-whole-company-to-ensure-compliance/#commentsTue, 28 May 2013 14:17:32 +0000http://blogs.forbes.com/alexandrawrage/?p=143I rowed badly in college.Our women’s “eight” wobbled and flailed while our coxswain shouted in alarm. In our first few practices, we veered near other boats, then to the bank, then back toward other boats.The river was narrow so the margin for error was small.Every so often, though, we would rest on our oars off to one side and let some truly accomplished rowers pull through.Their oars, their seats and their backs moved in unison and their boat surged forward with such precision that it seemed to skim an inch clear of the water.Such is the power of coordinated effort.If your compliance program is not coordinated, don’t expect results much better than our flailing efforts achieved.These eight elements of an ethics program should move in unison.

1.Monitor your management message

The message communicated by management is not sufficient in itself, but it is critically important.Senior managers can undermine a strong and coherent message the way a coxswain can throw off a crew.Employees expect their CEO and senior managers to speak strongly and publicly about abiding by all applicable laws and maintaining socially responsible practices, but their affirmations sink at once under the weight of a single undermining act or remark. I once saw an email from a very senior manager extolling the importance of due diligence on a high risk third party intermediary.Unfortunately, the manager had not learned to truncate his emails and, many messages down in the exchange, he had said “I know the whole due diligence process is ridiculous, but we have to get this done”.His message went viral.

2.Educate at every opportunity

Training can’t just happen at intervals.Compliance issues can be folded into the agenda of any meeting, and should be.Examples of both courageous conduct and malfeasance can be sanitized and discussed as “lessons learned”.Employees, especially those operating in opaque markets, should be asked what challenges they face and the examples they offer should be incorporated into the company’s training for that region.Good trainers will draw employees out by asking them to submit questions in advance or in writing.Such trainers will learn things they can teach their colleagues who operate in the region and should know more.

3.Make the most of your due diligence

Everyone has read about appropriate levels of due diligence for third parties, but too few people have thought about the opportunity that due diligence presents.A company can show its values and priorities by using collaborative due diligence and engaging third parties in the process.It can also win the support of those third parties in the process.To make the most of due diligence, explain why you’re doing it.Invite partners to discuss concerns and ask questions.Give your third parties access to the company’s hotline if you can do it and ask them to report concerns about the conduct or demands of employees and customers.Show them that due diligence can mark the first step in a mutually valuable relationship that should maximize both parties’ success while minimizing both parties’ risk.Provide online training.Encourage them not simply to sign off on your code of conduct, but to adopt their own as a statement, however simple, of their commitment to compliance and good governance.

4.Use gifts and hospitality as a platform for your message

Even if a company can afford and can legally justify expensive holiday gifts, lavish meals and first class travel for its customers, think twice about what you are saying.Is your company a sober and professional organization seeking to invest in its products and its public image, or is it skating near the edge of legality with extravagant sports events, extended trips to questionable conferences and protracted meals with fine wines, brandy and cigars?Engage your marketing team in this discussion.They will see and will repeat that the company invests in its products, not in junkets and boondoggles.

5.Ensure business buy-in

Give businessmen the business argument for compliance.Bribery, whether cash for contracts or grease payments for customs clearance, is bad for business.Bribes buy an unenforceable contract.They result in additional delay as each bribe-tainted deal is negotiated and re-negotiated.They create dodgy alliances with criminal elements in foreign governments and they invite repeat visits and, ultimately, extortionate demands from entrepreneurial bribe-takers.

6.Welcome the auditors as allies

Auditors are already embedded in your process.They know your business and they routinely travel to far-flung operations.Make sure they know what to look for with respect to bribery as well as other forms of malfeasance.Bribe-payers pay in round numbers.They falsify invoices or they submit serially numbered invoices from the trumped up books of shell companies.Don’t let your auditors operate in a silo with too little interaction with the compliance function.

7.Encourage those with the information you need to report through the company’s hotline

Don’t build a hotlines or “helpline,” then let it be ignored.Invest in ensuring that employees know about and are comfortable with your reporting mechanism.Employees, especially employees in non-democratic countries or those with security concerns, will need a high level of assurance that their comments will be either confidential or anonymous.They should be able to report at no cost to themselves through secure email or toll-free phone calls, in a language in which they’re comfortable and at any hour.Fits of conscience rarely occur during business hours.

8.Engage the public

The public is not an adversary.Certainly, there are watchdog organizations and investigative journalists keen to uncover wrongdoing.They play an important role and will continue to do so, whether you report out to the public or not.Greater transparency enhances a company’s reputation with both the general public and the media.Acknowledge areas where the company intends to improve while you take credit for past successes.That way you can build trust and shift the “us versus them” dynamic. Make information available whenever prudently possible, join industry “best practices” and standard setting groups, decry past wrongdoing in your industry and set a clear path forward.

If you can pull off all eight of these feats, and they take practice, training and skill, you can move your company like a varsity eight, and that is an impressive thing to see.

When FIFA’s leaders could no longer ignore the spate of scandals ranging from World Cup hosting decisions to irregularities in its internal elections, they announced a new “reform initiative.” The initiative was declared an effort to restore public confidence in the organization, but has done little more than polish the veneer on an outdated men’s club. The inaptly named Independent Governance Committee, of which I was a member until my resignation last week, was originally comprised of a cross-section of stakeholders, including two people who have since been elevated to FIFA’s Executive Committee, as well as governance professionals. The process has been expensive and time-consuming, but little has really changed back at FIFA’s headquarters in Zurich.

One area of influence the IGC was assured was the role of nominating experts for key positions. But after the IGC’s nominations were sought to fill a newly designed and critically important position – a position right at the heart of reform efforts — FIFA rejected the IGC’s recommendations in favor of its own candidate. (In so doing, FIFA also asked the IGC to stop putting female candidates forward, stating that no female candidate would be acceptable.)

The IGC had another opportunity to effect change when it proposed independent members on the ExCo in order to encourage more transparency and accountability. More than any other recommendation, this would have signaled a willingness to pry open the shutters on the organization. Even carefully controlled and even with an understanding that some items of business would have to remain confidential, this would have brought FIFA in line with well-governed corporations and non-profits worldwide. The ExCo rejected this proposal, lending weight to FIFA’s reputation as a secret society, answerable to no one.

As a matter of common sense, the IGC proposed a neutral, independent background review process for new candidates for senior office to reduce the chance that the organization would be embarrassed by inadvertent association with felons and miscreants and to explore possible conflicts of interest. The ExCo agreed instead to ask candidates to complete a “self-declaration” which, presumably, felons and miscreants would not hesitate to falsify. Days later, the CONCACAF Integrity Committee report described how Jack Warner misspent many millions of dollars of FIFA’s money to improve a property owned by companies he owns.

In line with well-established international practices, the IGC recommended that the FIFA leaders disclose their total compensation, including salary, bonus and perquisites. The ExCo declined, declaring the issue more one of public curiosity than good governance. FIFA benefits from public subsidy through its tax-free status, but FIFA argues that the public has no right to insight into these matters. The public, it seems, also has no right to know the performance criteria upon which these compensation decisions are based.

The IGC recommended age or term limits for key FIFA figures to reduce the stranglehold that permanent presidencies can have on any organization. Blatter has stated that this will be put to a vote at Congress, but has not made clear what terms will be recommended by the ExCo. Anything put to a vote without sufficient detail and ExCo support will, in the commotion that is Congress, likely die on the floor. Meanwhile, the 77 year old Blatter who took office in 1998 has begun to float the idea of standing for election a fifth time in 2015.

Blatter has all but declared “Mission Accomplished”, and in a sense it has been. Opportunities for change have been evaded, finessed or re-directed; he deftly avoids discussion of the recommendations that simply fell off the table over time. He did not debate them and did not explain himself; this is no surprise from a man who describes FIFA as if it were a sovereign state over which he presides.

The IGC has never had any means to compel FIFA to change. The only entity capable of insisting on transparency at FIFA is the Swiss government, to which FIFA’s unapologetic opacity should be as embarrassing as its $1.4 billion in tax-free reserves are interesting. I hope they will act.

Please note: The FIFA Media Department sent an email to Stephen Forbes, editor-in-chief, on April 25th stating that they believe that the article does not accurately reflect the achievements of the reform process undertaken by FIFA.

For a company once known more for writing the tabloids in Britain than featuring in them, News Corp. now finds itself in the awkward position of having its name splashed across headlines in the UK. Troubles began for the media conglomerate owned by billionaire Rupert Murdoch two years ago after it was uncovered that one of the company’s most successful newspapers, News of the World, hacked the mobile phone of a murdered school girl. Since then, allegations continue to emerge that the company routinely bribed UK public officials for information and illegally hacked into mobile phones of celebrities, athletes and politicians, including Members of Parliament.

The company has reportedly spent $350 million to date on investigations mounted by UK and US authorities.

What are other companies to make of the News Corp. scandal? Does it apply to them? The short answer is “yes”. While the facts range from colorful to outrageous, the News Corp. scandal is ultimately just one more story about a failed compliance program. Any company that wants to manage its compliance risks should be alert to these five points:

1. Personal ties to politicians add risk. We’ve seen this before: businesses that traditionally maintain cozy ties with politicians are at higher risk of paying bribes. In the world of journalism, author Nicholas Jones has described this as the “covert daily currency of relations between politicians and the press.” Rebekah Brooks, News of the World’s former chief executive, was arrested for allegedly bribing senior UK officials, and has since testified that she not only regularly met politicians for lunch and dinner, but that she also socialized with them at cocktail parties, birthdays, summer outings and Christmas celebrations, and accompanied them on yacht trips to Greece. Reports have even emerged that Ms. Brooks regularly texted with Prime Minister David Cameron and was also reportedly “lent” a horse by the Metropolitan Police Department. These kinds of relations should raise a red flag for any compliance department. Simply put, personal relationships between employees and politicians increase the risk for special treatment; very often, they are also accompanied by improper gifts, payments and other bribes.

2. Tone at the Top Matters. Rebekah Brooks was not the only senior employee charged with wrongdoing. The list of high-level News of the World employees charged with bribing top UK employees includes Andy Coulson, the former editor of the newspaper and onetime government spokesman for David Cameron; Stuart Kuttner, the paper’s longtime managing editor; and Greg Miskiw, an assistant editor who ran the paper’s news operation. Companies that want to ensure that their employees are not paying bribes must ensure that top-level executives get the message as well. This “tone from the top” dictates how the rest of the company perceives corporate commitment to compliance. How did News Corp. do? By last November, police had detained dozens of other journalists from News Corp.’s newspaper and that number appears to be growing.

3. Independence of Internal Investigations is Critical. News Corp. appears to have done one thing right. It has maintained the independence of its investigatory team. When allegations surface, government authorities often allow companies to investigate the problem themselves as a showing of good faith. These investigations are only effective if they are protected from key personnel tempted to bury the company’s dirty laundry. But this does not seem to be the case for News Corp.; the company’s independent investigatory body was given full authority to direct News Corp. staff to cooperate with all external and internal investigations and to obtain and disclose appropriate documents. And while this may not make Rupert Murdoch happy, there’s not much he can do about it because the investigatory body reports to the independent directors of News Corp.’s Board.

4. Industry Sweeps are Increasingly Common.Corruption scandals in one company often lead to investigations of wrongdoing at other companies in the same industry. In the US, we’ve seen this phenomenon play out in the pharmaceutical and financial services industries. In the UK, we’re now seeing this in the newspaper industry. Since the News Corp. scandal, UK authorities have opened bribery investigations into the Mirror Group Newspapers and have arrested employees at both the Sunday Mirror and Trinity Mirror as well

5. Cross-border Anti-bribery Investigations are Now Commonplace. Five years ago, coordinated, cross-border anti-bribery investigations between enforcement agencies were rare; today, they are commonplace. As more countries implement and enforce anti-bribery laws, multinational corporations face liability in multiple jurisdictions, both in their home state and abroad, for the same wrongdoing. For News Corp., a US company under investigation by both US and UK regulators, this means potential liability under both the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act. According to reports, US authorities have been collecting information about News Corp.’s alleged improper activities alongside their UK counterparts, and are close to finishing their investigation and opening talks over a financial settlement with the company.

Some of these lessons confirm what we have known for years about anti-bribery compliance; others indicate new trends in how companies should be responding to threats of corruption in their own organizations. What is certain is that the News Corp. story is not just for the British tabloids anymore.

]]>http://www.forbes.com/sites/alexandrawrage/2013/04/03/5-compliance-lessons-from-the-news-corp-scandal/feed/0Microsoft And The Rising Federal Scrutiny Of Briberyhttp://www.forbes.com/sites/alexandrawrage/2013/03/20/microsoft-whistleblower-allegations-highlight-global-corruption-risks/
http://www.forbes.com/sites/alexandrawrage/2013/03/20/microsoft-whistleblower-allegations-highlight-global-corruption-risks/#commentsWed, 20 Mar 2013 04:13:32 +0000http://blogs.forbes.com/alexandrawrage/?p=56It’s what makes it difficult for compliance officers to sleep at night. You’re going about your day when the phone rings; on the other end of the line is an attorney from the Department of Justice telling you that they’ve received an anonymous tip of bribes paid by a distributor in Europe to a foreign government official. Now what?

That scenario recently turned into a reality for Microsoft, which is under investigation by the DOJ and the Securities and Exchange Commission for bribes allegedly made on the company’s behalf to officials in Italy, Romania and China. The investigations were made public yesterday in an article by the Wall Street Journal. Microsoft now faces what an increasing number of other multinationals are dealing with in their interactions with foreign third parties: potential liability under the Foreign Corrupt Practices Act (FCPA). The Microsoft story is indicative of the compliance times in which we live; companies must manage large networks of long distance business partnerships while remaining alert to credible whistleblower “chatter” in their ranks. They must exhaustively investigate all credible claims of wrongdoing, often at extraordinary expense and with considerable disruption.

Increase in Whistleblower Actions

As reported by the Wall Street Journal, the Chinese bribery allegations against Microsoft were brought to the attention of the DOJ and SEC by an anonymous whistleblower. This won’t surprise those in the compliance community. A year ago, the Dodd-Frank whistleblower provisions went into effect, promising tipsters as much as 30% of any monetary sanction the agency ultimately recovers. Since then, whistleblower allegations have increased sharply, with the SEC receiving over 100 credible tips from whistleblowers in 2012 alone. In response, companies are redoubling efforts to strengthen their internal disclosure programs in order to try to deal with potential problems before employees choose to take them to outside authorities.

FCPA Liability from Third Parties

The Microsoft investigation highlights the liability companies may face when doing business with third parties overseas. Under the FCPA, companies may be liable for bribes paid on their behalf by foreign intermediaries even if the company is not aware of the bribe. For a large multinational like Microsoft, which has offices in more than 100 countries, this can mean keeping tabs on thousands of business partners all across the globe. “In a community of 98,000 people and 640,000 partners,” writes Microsoft Vice President and Deputy General Counsel John Frank in a response to the investigation posted on Microsoft’s website, “it isn’t possible to say there will never be wrongdoing.” This summarizes the challenges and the reality for most companies doing business abroad.

Best Efforts Not Always Enough

The Microsoft investigation reveals the unvarnished truth that, despite best efforts, bribes are a constant risk in business. Microsoft appears to have instituted a robust anti-bribery compliance program. Microsoft’s Standards of Business Conduct, for example, explicitly states Microsoft’s strict policy against bribes:

“Microsoft prohibits corruption of government officials and the payments of bribes or kickbacks of any kind, whether in dealings with public officials or individuals in the private sector. Microsoft is committed to observing the standards of conduct set forth in the United States Foreign Corrupt Practices Act and the applicable anti-corruption and anti-money laundering laws of the countries in which we operate.”

Perhaps of even greater importance, Microsoft also requires all outside vendors to read and comply with the Microsoft Vendor Code of Conduct, which also prohibits incentives such as kickbacks or bribes.

Microsoft has made significant efforts to encourage internal reporting. Not only are employees and partners who have concerns about compliance or Microsoft business practices allowed to report their concerns to Microsoft’s Office of Legal Compliance, but so too are customers and others outside the company. These compliance practices are specifically designed to prevent the need for outside investigation by the DOJ that Microsoft now faces.

All of this should not be discouraging to companies worried about complying with anti-bribery laws. Strong compliance programs, even those that fail to prevent all forms of bribery, do provide protection from liability. “[A] company’s failure to prevent every single violation does not necessarily mean that a particular company’s compliance program was not generally effective,” write the DOJ and SEC in their recently published Resource Guide to the FCPA. “[The] DOJ and SEC…do not hold companies to a standard of perfection,” the Guide continues. This may not be enough to guarantee corporate compliance officers a full night’s rest, but it should provide some comfort.

Please note: The author is the president of TRACE International, a non-profit business association dedicated to anti-bribery compliance. Microsoft is one of hundreds of TRACE member companies. This posting is based on publicly-available information.

]]>http://www.forbes.com/sites/alexandrawrage/2013/03/20/microsoft-whistleblower-allegations-highlight-global-corruption-risks/feed/8Five Schemes for Creative Corruptionhttp://www.forbes.com/sites/alexandrawrage/2013/03/12/five-schemes-for-creative-corruption/
http://www.forbes.com/sites/alexandrawrage/2013/03/12/five-schemes-for-creative-corruption/#commentsTue, 12 Mar 2013 16:29:14 +0000http://blogs.forbes.com/alexandrawrage/?p=49Don’t be too confident that you have a grip on the problem of bribery in your company. If you are a senior executive, a compliance professional, a lawyer or an auditor, you need to think like a criminal to stay ahead of the bad guys.

Strong internal controls deter and detect many strategies, but people who are determined to be corrupt can morph their methods to circumvent sophisticated controls.

The Sweetheart Deal: In this classic scenario, the bribe-payer conveys something of significant value to the recipient at a price far below its real value — a car , a house, stock, a work of art or jewelry. In one anecdote, a woman doing business in the Middle East was taken out to lunch by a customer. After lunch, they stopped in at a high-end jewlery store where she was assured that her companion and the manager were such close friends that any item in the store was “specially priced” at $400. She was meant to browse and pick out what she liked among watches and bracelets that cost many times as much. This interesting tactic invited the businesswoman to determine the value of her bribe, and also ensured that she would receive a receipt for the transaction, in case she was ever required to prove that she had paid for it. One drawback to this technique: sweetheart deals require a number of people to conspire in the transaction — the briber, the recipient, a complicit store manager — and this increases the risk of a breakdown. Bribery works best when there are smooth, knowing exchanges, unexpressed understandings and swift transactions, but the woman in this case was so stunned by the absurd lavishness of the offer that she simply stared and refused to believe he was serious. (That, by the way, is frequently a successful way to counter an attempt at bribery.)

Picking up the Bill: We aren’t talking about restaurant bills here. Big ticket items like tuition and medical bills provide an opportunity for serious bribes since the payers can quietly step in and make a payment to the private school attended by the recipient’s children, or the hospital where his mother is receiving care. These situations can arise from an apparently innocent request for advice on the best local school and can end with serious entanglements. The school or hospital involved is quite unlikely to ask questions and the bribe appears as a fait accompli with the consequences to be extracted later.

Selective Subcontracts: In this widely used technique, the bribe-seeker agrees to award the contract on condition that some of the work is diverted to a subcontractor owned by him directly or through a shell company or close relative. The subcontract may involve real work at an inflated price, or no work at all. Either way, the negotiation and ultimate subcontract can be finely tuned to convey just the right amount of value and the whole thing can be recorded on both companies’ books.

Gift Cards: For small bribes, gift cards are so close to ideal that companies serious about controlling corruption should prohibit their use. They are as welcome as cash to many bribe recipients and allow for precisely calibrated levels of bribery. Every person in a supply chain can get his or her own appropriate level of payoff. Gift cards have the additional benefit, at lower denominations, of appearing fairly benign when recorded on the company’s books. Managers in far-flung branch offices may buy them in large quantities and distribute some as employee incentives, then pass others on in thick bundles to bribe recipients. This difficult to detect strategy works well for the petty briber, but is of less use to bribe-payers with grand ambitions.

Poker Ploy: For those who need to convey million dollar bribes, here’s a new technique pioneered in Macao and reported in the Washington Post. Bribe payers can invite their beneficiary for a night of gambling and arrange for a professional gambler to meet him there, challenge him to play, then artfully allow to him win the agreed upon amount. This technique makes the bribe taker look like a high roller, lets him show off to his friends, and gives him a receipt from the casino. He doesn’t even need to be covert about his windfall. Indeed he can boast about it (and will).

Just a few years ago, such devious devices weren’t needed. In those days, bribery was business as usual. Blunt and clumsy bribers just passed out wads of cash. Nowadays a corrupt operator needs to show considerable ingenuity. In turn, a legitimate executive needs to show considerable sophistication to match. Those tasked with protecting their companies from liability should not imagine that stale strategies will be effective against new strains of bribery.

]]>http://www.forbes.com/sites/alexandrawrage/2013/03/12/five-schemes-for-creative-corruption/feed/0Tips and Bribes: Not the Same Thinghttp://www.forbes.com/sites/alexandrawrage/2013/02/20/tips-and-bribes-not-the-same-thing/
http://www.forbes.com/sites/alexandrawrage/2013/02/20/tips-and-bribes-not-the-same-thing/#commentsWed, 20 Feb 2013 12:08:40 +0000http://blogs.forbes.com/alexandrawrage/?p=34Whenever I travel to Europe, as I have this week, someone invariably tells me not to worry so much about “small bribes.” They are, after all, really just a form of tips and surely there is nothing wrong with tips: small expediting payments to low level bureaucrats to clear customs, secure basic government services or schedule and pass inspections. This is usually said in a manner that conveys just how worldly the speaker is. Europeans, in particular, express sympathy for the argument that both serve the purpose of supplementing low wages, both are implicitly or expressly extortionate in nature and both are paid with the expectation of a quid pro quo. In fact, “official tipping” and tipping service providers are a world apart, both in the relationship they support and the consequences they carry.

The timing of the payment is critical. Wait staff at restaurants in many countries have certainly grown to depend on tips to supplement their wages. Whatever you think of this development, low hourly rates for most service industries have driven this tipping culture and entrenched it over time. There is little incentive for restaurant owners to raise salaries that the public is willing to supplement. The public is not without recourse, however. Tips are determined after the service is provided. Tips can be adjusted if service is abysmal or surly. Patrons can determine never to return and, in every case, they will have alternatives from which to choose. They needn’t fear miserable service on future visits because they needn’t return.

Gatekeepers to government services, by comparison, are usually the only game in town. The person responsible for signing off on shipments, permits, licenses or phone service is typically the only face you see. More importantly, their hands are outstretched at the beginning, not the conclusion, of the service. The bribes demanded are not voluntary and the amount is rarely discretionary. Unlike restaurants or hair salons or taxi drivers, government officials on the take generally hold a monopoly on their service and they can wreak havoc with businesses that don’t know how to respond. This is compounded when there is urgency around the transaction, which is almost always the case.

Private sector customers are not isolated. A customer at a restaurant finds a ready ally in the restaurant’s owner or manager. The owner’s interests in superior service and a pleasant transaction are aligned with the customer’s. By comparison, when a grasping government official is skimming personal profits from the business community, that official’s boss may gain more from their alliance than from serving the public interest. Low level officials routinely pay off those above them in order to ensure they look the other way and leave them in their lucrative position. This sort of pyramid scheme, with those lower in the reporting chain kicking up a portion of their haul, has no parallel in the service sector. Restaurant owners are content for their employees to be paid by their patrons, but only while service is good and the reputation of the restaurant enhanced. If waiters began overt and extortionate shakedowns as bureaucrats do in many countries, they’d be replaced in a heartbeat.

This comparison also begs the larger question of whether we should be introducing an incentive scheme into government services. In many countries, government employees are underpaid and supplement their incomes through bribery. This is problematic for several reasons. First, the most creative and entrepreneurial officials quickly learn to manufacture obstacles in order to exact a toll to resolve them. Second, once a bribe is paid, the official may fail to deliver, leaving the company without recourse to complain about a failed illicit transaction in which it colluded. And, finally, does anyone believe that it’s wise to have government officials responding more briskly to those quickest to pay? Do we want drug cartels paying fees to expedite shipments of contraband? Factories paying for expedited building permits before environmental impact studies can be completed? Police responding more rapidly to calls from companies that deliver envelopes of cash? These are the hallmarks of a thug state, not a service industry, and companies support this rampant, low-grade extortion at their peril.

]]>http://www.forbes.com/sites/alexandrawrage/2013/02/20/tips-and-bribes-not-the-same-thing/feed/0FIFA Governance Recommendations: Not a Close Callhttp://www.forbes.com/sites/alexandrawrage/2013/02/12/fifa-governance-recommendations-not-a-close-call/
http://www.forbes.com/sites/alexandrawrage/2013/02/12/fifa-governance-recommendations-not-a-close-call/#commentsTue, 12 Feb 2013 15:47:02 +0000http://blogs.forbes.com/alexandrawrage/?p=26FIFA put together an Independent Governance Committee (IGC) in late 2011 because it needed to rehabilitate its reputation after a series of scandals. I am a member of the IGC. We issued our first report in March 2012. The second report was issued last week with a series of recommendations that were included in the first round, but pushed to the second round because they were deemed more controversial and FIFA wanted something to deliver at the 62nd Congress in Budapest in March. Some compliance context might be useful.

The recommendations include three points that illustrate the distance between FIFA’s current position on governance and widely established “best practices”. To be clear, FIFA has not rejected these provisions, they’ve simply failed to implement them to date. The IGC has no means by which to compel change, yet FIFA describes itself as being bullied by the advisory committee. Predictably, the discussion has shifted – on both sides – to the public forum. The IGC must consider how much it can accomplish; FIFA must decide how much it values good governance, the reform process and public opinion.

Independent Oversight of the Executive Committee

For twenty years governance best practices have required independent board members. No one questions the logic behind having members of the board who have no material interests in the organization and so are not subject to inappropriate influence. The independent members’ role is to ensure the entity is well-managed — with transparency — and that decisions are made, in every case, in the interests of the organization and not the interests of the most powerful.

All companies traded on US exchanges now include independent board members. Non-profits have also adopted this practice. Whether FIFA seeks to be treated as a non-profit, per its charter, or as a multinational corporation, this is a well-known and well-traveled path to better governance and better optics.

The IGC initially recommended that two members of FIFA’s Executive Committee (ExCo) be independent. The IGC’s compromise position is that the Chairman of the Audit Committee should be an independent observer in all ExCo meetings. FIFA has resisted both of these recommendations.

Vetting Candidates for the Executive Committee

For far more than twenty years, corporate best practices have held that a thorough and independent vetting process for board members at the outset will reduce the risk of embarrassment and wrongdoing over time. For a non-profit, this is more important. In the absence of more obvious metrics like a share price, the value to the public of the organization is measured in the success it has in fulfilling its mission. FIFA’s stated mission is “Develop the game, touch the world, build a better future”. FIFA’s core values are “authenticity, unity, performance and integrity”.

In furtherance of this last core value, FIFA states that it “must be a model of fair play, tolerance, sportsmanship and transparency.”

The IGC has proposed a neutral, centralized vetting process for members of the ExCo to uncover past misconduct or conflicts of interest that should disqualify the candidates from service. To be credible, this should be managed in such a way that interested parties do not control the outcome. It is difficult to imagine that a company or non-profit would not want to have a meaningful process enabling them to understand a candidate’s reputational baggage before placing him in a position of trust. FIFA has done nothing meaningful to date with regard to vetting its candidates.

Transparent Compensation and Benefits

Compensation is a sensitive issue. Everyone understands that. People will always mutter about levels of salaries and the extent of oversight, but they’ll feel a part of the discussion if they are at least given the information. Nothing erodes confidence quite like the secret-society, bunker mentality we’re watching at FIFA.

To be clear, we’re talking about true transparency into the whole picture: salaries, bonuses, retirement benefits, perquisites of all kinds. The corporate world has pivoted on this issue. Transparency is the rule and not the exception these days. US non-profits are required to disclose executive salaries in their annual 990s. Even Switzerland is dismantling its long-standing bank secrecy. And still FIFA resists.

FIFA is producing governance case study material that will be discussed for years. The IGC recommendations make simple, clear sense. Unfortunately, the background noise about match-fixing, sexism and succession intrigue have overshadowed the very simple, ordinary measures the IGC has recommended. These recommendations are now at risk of becoming casualties of the political process when their merits are obvious.

]]>http://www.forbes.com/sites/alexandrawrage/2013/02/12/fifa-governance-recommendations-not-a-close-call/feed/1Acting in Concert: How to Avoid Hostage Taking By Bribe-Seekershttp://www.forbes.com/sites/alexandrawrage/2013/02/01/acting-in-concert-how-to-avoid-hostage-taking-by-bribe-seekers/
http://www.forbes.com/sites/alexandrawrage/2013/02/01/acting-in-concert-how-to-avoid-hostage-taking-by-bribe-seekers/#commentsFri, 01 Feb 2013 14:22:37 +0000http://blogs.forbes.com/alexandrawrage/?p=18In a previous job, as an in-house lawyer, I spent a lot of time in the Levant. During one encounter there, a government official with whom I was meeting assured me that my competitor, who he named, had offered him a substantial personal payment to an off-shore account. It took him a long time to get to the point and I waited for him to spell it out. The clear goal of his comment was to initiate a bidding war between the two companies. What he didn’t know was that I knew and respected my counterpart at the other company. I simply picked up the phone and recounted what I had heard. My colleague at the other company laughed and assured me they’d been told the same thing about my company. The government official had not imagined that these two companies – cut-throat competitors by all external indicators – would ever share information of this kind.

Corruption is often about forces beyond the reach of companies and for which companies can’t reasonably be held responsible, but this still leaves a great swath of conduct that companies can influence. The ideal is for companies to think proactively and not wait until after they’re on the run from the enforcement agencies to wonder what they might have done better to address bribery concerns. There are simple strategies for reducing bribery that companies can implement in concert.

Communicate. Few realize that those who ask for bribes are generally pretty risk averse. They prey on people who are isolated or vulnerable (policemen threatening drivers with jail time if they don’t resolve the “fine” on the spot), or they reach out to those they expect will be a willing partner in their crime, (marketing professionals or sales agents who have foreshadowed their complicity). It’s embarrassing for a government official to stand with his hand out when the intentions of the other person are uncertain. So, instead, bribe-takers return to those who pay reliably and they develop comfortable, criminal ties. Companies can avoid becoming the favorite patsy of a corrupt customer, by signaling clearly and repeatedly that they intend to be good corporate citizens and to avoid all forms of pay-offs, bribes and kick-backs. Broadcasting this message will cause many to pause before raising the possibility of a bribe, which is often sufficient to prevent the conversation altogether.

The message should be positive. A gentle but firm message that the company intends to play fair, embrace transparency and provide a good product at a competitive price is sufficient. Companies shouldn’t underestimate the stickiness of a reputation in this respect, both for good and for ill. A strong initial message, particularly when first entering a market, will reduce demands for many years to come. Corrupt officials won’t risk rejection and will turn instead to easier targets.

Over time, a clearly articulated policy may well have ripple effects outside of a single company. And if this reputation spreads to a whole industry or country, so much the better. We routinely hear government officials say that the companies of Country X bribe while those of Country Y don’t, even when that sort of generalization can’t possibly hold true. Still, it indicates that companies speak louder and benefit expansively when they collectively subscribe to a single, clear message against corruption.

Deter. Deterring those who would seek bribes begins by making your company into a less attractive target. Companies should allow themselves to be seen embracing transparency. Cynics may argue that the growing number of grand normative statements about combatting corruption and having “zero tolerance” for bribery espoused by business associations and industry groups are nothing more than public relations exercises. But these efforts should not be so easily dismissed. Companies that embrace transparency will see how uniformly good it can be in many cases. Bribe-tainted deals need to be negotiated and executed in the darkness: while companies paying bribes seek to avoid the legal and political repercussions, the officials selling themselves to the highest bidder need to keep their deal quiet lest others in their food chain demand a cut. Introduce some light and the players in the game scuttle away.

You can be creative when encouraging transparency. I have conducted training in jurisdictions as varied as Yemen and Indonesia and few things are as satisfying and effective as inviting key government officials, identified by the companies attending the training, to participate. They can be shown the appropriate level of respect, seated near the front and acknowledged in the introductions, but then they sit and listen to the challenges that companies face, the damage that corruption does, the reasons companies may be reluctant to invest in their market. Their very presence makes it difficult for them later to breeze past what they have heard and make inappropriate demands. Some will still brazen out their requests, but the chance to hint and hope and generally dwell in the grey area of purported ignorance is gone.

Share. My encounter in the Levant illustrates why government officials fear the sharing of information. This is precisely why companies must find ways to cooperate, without loss of competitive advantage and without implicating antitrust concerns. Wherever possible, companies want trained customers with a sophisticated understanding of good business practices, third parties committed to transparency and a reliable and principled supply chain. The next step is to develop a common system in which both companies and their foreign business partners share a unified set of standards to prove their commitment to these ideals. Just as college applicants can produce SAT scores as a broadly accepted standard when applying across a large number of competing institutions, the good actors in international business should also be able to distinguish themselves with credentials that are meaningful throughout the community, transferable and lasting. These portable credentials can include training, compliance audits and certifications.

High levels of enforcement have executives hunkered down, afraid that they’ll end up in the enforcement cross-hairs. But the worst thing for a company to do right now is to become overly insular. By looking up and outward at the larger problem of corruption and the flaws and expense inherent in going it alone, companies are beginning to see that there are ways to collaborate in their response to this challenge, spending less and doing more.

]]>http://www.forbes.com/sites/alexandrawrage/2013/02/01/acting-in-concert-how-to-avoid-hostage-taking-by-bribe-seekers/feed/0What Companies Can’t Do About Corruptionhttp://www.forbes.com/sites/alexandrawrage/2013/01/24/what-companies-cant-do-about-corruption/
http://www.forbes.com/sites/alexandrawrage/2013/01/24/what-companies-cant-do-about-corruption/#commentsThu, 24 Jan 2013 15:39:27 +0000http://blogs.forbes.com/alexandrawrage/?p=5In a coup-prone country in western Africa a few years ago, I heard this story over dinner. A major international development bank had settled on terms for a significant loan to the state for a series of infrastructure projects. The funds arrived and the person telling the story accompanied the Minister of Finance to the main bank. The Minister instructed the teller that there was to be a new and more favorable currency exchange rate for the day and the financial instrument was to be converted at this new rate. Approximately 90% of the total was to be deposited in the State’s account and the balance, generated by the more favorable rate, was to be deposited in a second account, for which he slid across the account number. The original exchange rate was then restored.

I don’t know if this story is true, but the person with whom I was dining was in a position to know and had little reason to make it up. It didn’t reflect well on his organization and so was, as they say, a statement against interest. It probably doesn’t matter if it is true; it’s still a fine example of how corruption at a certain level is beyond the reach of enforcement agencies and international organizations tasked with increasing international transparency and prosecuting corruption. The right amount of development funds ended up in the right account. The senior official made off with a significant cut, probably after tipping the teller as one might a blackjack dealer. The exchange rate was restored and the lender, if they ever checked, would have found nothing amiss.

The last decade has seen a consistent trend toward greater enforcement of anti-bribery laws against companies and individuals, both by the United States and, with a less steep trajectory, other countries. Whether they’re stating it expressly or acting on it quietly, governments are using corporations as their primary tool to reduce international bribery. They alarm companies with vast fines and terrify individuals with substantial prison sentences with the hope of ending the payment of bribes because they cannot, in most cases, do much of anything about those demanding them. This is not inappropriate. Companies are regulated, subject to laws and answerable to shareholders. The worst offenders demanding bribes, on the other hand, do so with impunity, hiding behind sovereign immunity and, often, their own, complicit local law enforcement. Abacha. Suharto. Marcos. Duvalier. It’s a longstanding tradition, still thriving in many countries today.

US and some European law enforcement agencies have been extraordinarily successful, with fines in the United States now counted in the billions of dollars and other jurisdictions promising to catch up soon. While these efforts have done more than anything else to reduce bribery, they have yet to convince us that companies are both the sole source and solution of all international corruption — and that’s insupportable. There are situations, as in the story above, where the government official isn’t just above the rules, he’s designing the rules to suit himself. A more typical situation looks like this: a US company is keen to enter into a joint venture with a national oil company to drill for oil in a particularly challenging market. Concerned about the US Foreign Corrupt Practices Act (FCPA), the far-reaching law that criminalizes improper payments to foreign officials, the company hires lawyers and accountants with great expertise in the region. All transactions are scrutinized. All contractors and third parties are vetted. Everyone standing near the transaction is thoroughly and repeatedly trained. The US company, in accordance with the terms in its contract, makes quarterly payments to the national oil company, accounting for everything accurately in its books. At intervals thereafter, the kleptocratic Minister of Petroleum reaches his sticky arm into the state’s till and pulls out whatever he needs. Is the US company responsible for this corruption? What about the bank into which the funds were deposited? Or the governments that prop up the grasping leadership? Or the consumers who eventually buy the products far downstream?

Unfortunately, some companies are actively and knowingly participating in bribery because they’re impatient for higher sales, they have a shoddy product or they believe it’s the only way to do business in some countries. Far more are working to get this issue right: they’re broadcasting the right message, implementing appropriate controls and safeguarding their reputation. I will talk about both communities in this new blog, but let’s start by agreeing that there is intractable corruption at the highest levels in some states, including a few OECD states, that we can’t reach with more prosecutions of multinational companies. The simple reality is that there are just some things that companies can’t do about corruption. Next, we’ll be talking about what they can do.